Unravelling Structural Underdevelopment: Is Governance Quality the Key?

Abstract

Structural underdevelopment remains a critical economic challenge globally. Despite significant advancements, many countries and regions continue to face developmental hurdles due to historical and systemic factors. Among the myriad of factors, the quality of governance has garnered extensive focus for its role in economic outcomes. This study aimed to investigate the relationship between governance quality and economic performance of the countries, guided by institutional theory. Employing data from 197 countries over 1996 to 2022, sourced from the World Bank and the World Governance Indicators, we applied fixed effects and random effects. In addition, the Hausman test was applied in order to initiate the choice between fixed and random effect models. Furthermore, the data was also analysed through descriptive statistics and quantile regression for detailed revelations. Initial findings indicated considerable disparities in governance quality and GDP per capita among income groups. The beta coefficients from our regression analysis elucidated the significance of governance on economic outcomes. Specifically, Voice and Accountability implied a non-positive relation with GDP per capita, whereas Regulatory Quality and Rule of Law exhibited significant positive impact. Stronger positive relationships were evident in the random effects model, reinforcing the connection between governance improvements and economic growth. This research aimed to inform public policy in Pakistan and similar contexts, highlighting how governance quality can affect macro-economic outcomes.